British defence stocks BAE Systems and Babcock would still merit a "buy" rating even if European defence spending falls short of the level the market is banking on, according to Citi.
The US bank's base case assumes European nations lift defence spending to 3.5% of gross domestic product, the level it believes is needed to deter adversaries and keep the region secure, and its price targets rest on that assumption.
But with government debt high across much of Europe and political uncertainty rising, Citi tested what fair values might look like if spending reaches only 3% over the long term.
Even under that more cautious scenario, the bank reckons about half the stocks it covers would offer enough upside to keep their "buy" ratings.
That list includes Babcock, alongside the European names Dassault, Leonardo, RENK, Rheinmetall and Thales.
BAE Systems would also stay a "buy", the bank said, provided the United States maintains its own defence spending plans.
The analysis reflects growing debate over whether European governments can afford the sharp increases in military budgets promised in recent years, as the war in the region drives rearmament.
Citi also flagged Sweden as probably the best placed, both politically and fiscally, to sustain the higher 3.5% target.
That, it argued, reduces the risk of a downside scenario for Saab, the Swedish defence group.
The note underlines how sensitive defence valuations have become to assumptions about future government budgets, at a time when the sector has been among the strongest performers in European markets.
