Donald Trump's surprise victory in the U.S. presidential race is pushing mutual fund managers out of dividend stocks and into the shares of financial, industrial and materials companies that stand to benefit from rising inflation.
Although inflation remains subdued by most measures, U.S. longer-dated Treasury yields rose on Thursday to their highest levels in more than 10 months after Trump emphasized infrastructure spending and other fiscal stimulus measures in his acceptance speech on Wednesday.
Higher inflation lowers the relative value of bonds, with long-dated debt the most vulnerable to inflation expectations.
Increased spending on infrastructure could spur growth and expand the budget deficit, market participants say.
Dividend stocks, which have been viewed as an alternative for income-focused investors given low bond yields, slumped in the wake of Trump's victory. Utility stocks in the S&P 500 are down 6.1% since Tuesday's close, while real estate companies are down 3.8% over the same time.
"Cyclical companies were unduly cheap going into this election, and now we think that the inflation trade is here to stay," said Ernesto Ramos, head of equities at BMO Asset Management Group in Chicago.
His funds have been adding to positions in financial companies such as Wells Fargo and Lincoln National Corp that should get a margin boost from higher interest rates, he said.
The Trump administration will be less likely to focus on regulations that have tamped down on bank profitability and led to more stringent lending practices, said David Ellison, a portfolio manager with Hennessey Funds in Boston, who said he was adding to his regional banks holdings.
"Any kind of easing of regulations will make loans easier to get and banks more willing to lend," he said.
The S&P 500 bank index rose nearly 10 % over the past two sessions and closed Thursday at its highest level since July 22, 2015.
Trump's promises to renegotiate trade agreements could also push inflation higher by raising the cost of imported products, helping domestic materials producers such as United States Steel Corp and Commercial Metals Co, said Eric Marshall, a portfolio manager at Dallas-based Hodges Capital.
"Anybody who competes with imports is going to see a benefit," he said.
Lamar Villere, a portfolio manager at New Orleans-based Villere & Co, said his funds were adding to small-cap infrastructure and defense companies, and he expects to see more mergers and acquisition activity given Trump's repeated statements that regulations are holding back the broad economy.
"We are looking at deals that might not have happened under a heavier regulatory environment," he said.