Lasting around ten years or so historically in the UK, a business cycle is thought to be a consequence of the way businesses and investors interact.
There are two basic economic phases – expansion and contraction – and one inevitably leads to the other, according to traditional economics. For example, when confidence is rising, businesses tend to invest to meet rising consumer demand and the economy grows. However, after a shock such as a financial crisis, the reverse trends are observed as confidence wanes and growth slows. Deciding where we are in a given cycle is therefore important in terms of an investor’s asset allocation and the extent to which, for example, they are exposed to “growth” as opposed to “value” themes and assets.