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:

  1. Capital Inflow: High profits attract new investment.

  2. Overcapacity: Too much capital leads to oversupply and falling prices.

  3. Capital Exit: Losses drive investors and businesses out of the market.

  4. Recovery: Reduced capacity restores profitability.

Importance:

  • Guides long-term investment strategy

  • Helps identify cyclical industries and market timing opportunities

  • Encourages disciplined capital allocation