The pandemic and subsequent fiscal and monetary measures aimed at reviving economies introduced significant distortions and dislocations across industries and investment themes. Central banks struggled to manage the federal funds rate effectively, while increasingly politically driven fiscal stimulus contributed to prolonged inflation.

This imbalance between fiscal and monetary measures led to the fastest interest rate hike cycle in over a decade. In this complex macroeconomic environment, the inherent cyclicality of certain industries became more apparent, and investors shifted their focus away from long-duration, high-growth assets with greater long-term potential.

Fig 1: Performance 1YR Horizon

BRIIDGE Shortcut: TS Reference Index

Fig 2: Sales Growth [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Instead, they gravitated toward safer, short-duration assets characterized by profitability, predictable revenues, and business-to-business (B2B) customer profiles. Within this shift, several industries in the broader Industrials sector aligned with this trend, resulting in sector performance that closely mirrored the overall market.

However, the Pollution & Treatment Controls industry, buoyed by additional tailwinds, outperformed both the market and its reference sector on an equal-weight basis over 3- and 5-year horizons. Following an initial post-pandemic boost, this industry’s positive spread against the market persisted well beyond the first few quarters.

In contrast, long-duration assets in other sectors experienced considerable drawdowns, with demand drivers evaporating as liquidity from monetary stimulus faded. Beyond the short-duration nature of assets within this industry, market outperformance can also be attributed to the industry's specialized "niche" market segment and its monopolistic tendencies.

These traits are reinforced by consolidation among key players, driven by long-term mergers and acquisitions (M&A) strategies. As a result, companies like Federal Signal Corporation (+100% vs. benchmark over 3 years) and CECO Environmental Corp (+250% vs. benchmark over 3 years) reported record backlogs and sales quarter after quarter.

Fig 3: Operating Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

While sales growth for the broader Industrials sector has been trending downward, it continues to rise in the Pollution & Treatment Controls industry. Similarly, while net income margins have stagnated in the sector, they are increasing within this industry. This outperformance is further supported by a lack of competition due to stringent regulatory requirements and the growing risk of natural disasters linked to climate change.

These factors have positioned the industry as an effective inflation hedge. However, with the reintroduction of accommodative monetary policy, there may be emerging arbitrage opportunities on the horizon.

Fig 5: Net Income Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 6: Performance [1YR]

BRIIDGE Shortcut: TS Reference Index

Fig 7: Dividend Yield

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 8: Net Debt To Ebitda [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA