By David Coombs

After the events of the past two months, it may sound counter-intuitive to say it but here goes…I think the UK is starting to look like the grown up in the room, particularly in comparison to the US and parts of Europe.

Faced with political upheaval and turmoil in financial markets, democracy and its checks and balances ultimately held up pretty well in the UK. The ruling party was brutal in removing Liz Truss and Kwasi Kwarteng, former prime minister and chancellor, after they created extreme volatility in gilt markets (UK government bonds), sterling and UK shares with a badly executed plan for growth. So far, investors have responded positively to the appointment of Rishi Sunak as prime minister, with Jeremy Hunt by his side as chancellor.

Looking ahead to 2024, we face the prospect of either Mr Sunak or Sir Keir Starmer as prime minister. I believe that neither are particularly worrying prospects for the public and investors because they are centrists. In a world that has been driven by the rise of populism, the UK – unlike some of its international peers – has reverted to type.

We now have a government in place that is considered more fiscally responsible than its predecessor – and this is reflected in Bank of England governor Andrew Bailey’s recent comments that interest rates are likely to go up by less than the market had anticipated.

If the UK ends up with lower interest rates than parts of Europe and the US, this could spell good news for our corporate bond market, because lower interest rates will bring down the cost of borrowing for companies (as well as for those with mortgages).

With this in mind, I think blue chip bonds issued by UK companies with international earnings could offer a potential investment opportunity, particularly if inflation starts to come down (high inflation is generally bad for bonds because it erodes the “fixed income” they pay over time). For example, three to five-year bonds issued by retailer Next and Centrica, the owner of British Gas, offered attractive yields of 5 per cent to 7 per cent at the time of writing.

I also favour shares with a similar profile: large-caps with significant overseas earnings. This view fits with concerns I still have about the UK economy. I worry that the government is planning to increase taxes while the Bank of England is due to raise interest rates (albeit to a lesser degree than was anticipated two months ago) as we head towards recession. This is not an ideal scenario because both run the risk of deepening an economic slump, particularly as higher taxes will put the UK consumer under even more pressure. This is why I am avoiding economically-sensitive or cyclical companies.

Mr Bailey’s recent warning that the UK faces the prospect of a two-year recession, which would be the longest on record, was not helpful in the slightest. It caused sterling to plunge relative to other major currencies. As the UK is a net importer of goods, this is effectively inflationary and the last thing we need right now.

We also need to talk about Brexit. No longer having access to the single market places the UK at a disadvantage to its neighbours in the European Union and means we need to differentiate ourselves in order to attract foreign investors. This was presumably the thinking behind Ms Truss’s plans to lower corporation tax to tempt international companies to set up shop here. However, her plan was executed so badly that Mr Sunak and Mr Hunt have now been left with little room to manoeuvre, so the UK is unlikely to benefit from any Brexit upside any time soon.

Despite these issues, I would like to end on a note of optimism. When you think of how international investors articulate their view on the UK, it is typically via sterling and gilts.

If you look at both, they suggest that very few people feel positive about the UK’s prospects right now. In my opinion, this is overly negative and doesn’t reflect that we have a more stable government in place. There is room for a positive reappraisal.

Finally, the UK doesn’t look like such an outlier when you consider what is happening in other parts of the world. In the US, there are concerns about President Joe Biden’s health, as Donald Trump prepares to launch his 2024 campaign; we have seen the rise of populist leaders in Italy and Turkey, and there has been a breakdown in relations between Germany and France.

Things are certainly not as bad in Blighty as they seemed a few weeks ago.

David Coombs is head of multi-asset investments at Rathbones