What is the Capital Cycle?
The Capital Cycle describes the process through which businesses and industries allocate capital, compete for resources, and respond to market profitability. It’s a framework for understanding how capital inflows and outflows impact industry competition, capacity, and profitability over time.
Phases:
Capital Inflow: High profits attract new investment.
Overcapacity: Too much capital leads to oversupply and falling prices.
Capital Exit: Losses drive investors and businesses out of the market.
Recovery: Reduced capacity restores profitability.
Importance:
Guides long-term investment strategy
Helps identify cyclical industries and market timing opportunities
Encourages disciplined capital allocation