This study develops a system dynamics model to analyse the European defence sector’s financial and operational dynamics from a firm-centric perspective, addressing gaps in existing macroeconomic analyses. The model captures complex, interconnected relationships between geopolitical tensions, funding mechanisms, and operational constraints over the short-term revealing that defence sector earnings face significant vulnerability to three key factors in ascending order of impact: geopolitical instability, delivery delays, and unwillingness to spend on defence. Moderate stress levels in defence spending and delivery delays have a greater impact on cumulative earnings uncertainty due to complex factor interactions, compared to geopolitical shock probabilities which has a greater impact on the absolute value of cumulative earnings.
For asset managers, the findings emphasise developing prudent risk management strategies that account for the sector’s exposure to intra-European political uncertainties and broader geopolitical volatility.
in VBA Journaal door Khesav Bhatt