Citi’s 2026 defence playbook puts the spotlight firmly on the UK, where the sector sits at the crossroads of geopolitical pressure, fiscal constraint and a once-in-a-generation rearmament cycle.
The headline: BAE Systems is Citi’s top UK pick, flagged as a ‘buy’ with a target price of 2,192p, riding a multi-year surge in European defence budgets that are legally and politically hard to row back from.
Citi notes that only 20% of BAE’s sales are to UK defence, limiting exposure to any domestic fiscal wobble while positioning it squarely in the slipstream of rising US and European procurement.
The UK itself is in a trickier place. Citi highlights Britain as one of the major European economies where increased defence spending faces political pushback and limited fiscal space, with a 4.8% deficit and 97% net debt.
But it nonetheless expects UK defence budgets to grind higher toward NATO’s 3.5%-of-GDP target by 2035, translating into procurement growth of 4.9% annually—ammunition for long-duration orders at the likes of BAE and Rolls-Royce.
Rolls-Royce, meanwhile, lands in ‘neutral’ territory. Citi flags its valuation as demanding, with the stock requiring notably more long-term profit growth to justify its current market pricing relative to expected procurement expansion.
The other UK-listed defence name with upside, in Citi’s view, is QinetiQ, rated ‘buy’. Here, too, the macro tailwinds matter: the domain shift towards land systems, missile defence and counter-UAV tech is expected to drive outsize growth in the categories where QinetiQ is strongest, lifting “Other” defence markets by 4% CAGR.
The bottom line: Citi thinks the UK defence complex enters 2026 with valuation support, structural demand and credible spending pathways… even if Westminster’s balance sheet would prefer otherwise.
