Investment Committee - December 2025

Navigating the Bear Steepening in an AI-Driven World

This month, the Investment Committee’s discussions centered on a developing dichotomy in global markets. On one hand, the narrative of innovation-led growth remains the primary engine of investor optimism, with Artificial Intelligence (AI) continuing to act as the structural pillar of equity valuations. On the other, the "plumbing" of the global financial system is flashing warning signals, characterized by rising yields at the long end of the curve despite central bank easing at the front end.

The Return of the Bond Vigilantes?

The meeting began with a critical review of fixed income markets, where the committee observed a distinct "bear steepening" trend. While the Federal Reserve and other central banks proceed with rate cuts to support near-term liquidity, long-term bond yields in the U.S. and Europe have drifted higher.

Several structural factors are driving this divergence. Notably, Japan is "leading the way higher," with 10-year yields touching levels not seen in years, signaling a global repricing of risk-free rates. Furthermore, technical shifts in European pension funds—specifically in the Netherlands—regarding long-end duration appetite have added pressure to the curve.

The Committee noted that while the Fed is managing short-term liquidity through mechanisms like T-Bill purchases to address repo market discrepancies, the long end of the curve is increasingly sensitive to fiscal realities and debt sustainability. For investors, this implies that long-duration bonds currently carry volatility characteristics akin to equities, without the requisite risk premium.

The Evolution of the AI Trade

Despite the headwinds in fixed income, the equity outlook for the coming year remains decidedly bullish, anchored by the productivity revolution of AI. External analysis reviewed by the committee suggests that 2026 could see double-digit market growth, driven almost exclusively by AI’s integration into the broader economy.

However, the nature of this trade is shifting. The focus is moving beyond the headline mega-caps toward the broader ecosystem required to sustain them. The committee highlighted the "AI adjacent" sectors—specifically energy, utilities, and mid-cap infrastructure firms necessary to power and cool data centers—as areas offering more attractive valuations than the crowded trades of 2024.

Academic Insights: The Limits of Human Judgment

In our regular review of quantitative research, two themes stood out that reinforce our systematic approach.

First, a review of recent academic literature reveals that AI is no longer just an investment theme; it is becoming the investment manager. Research indicates a surge in the use of AI agents for end-to-end portfolio management, from alpha generation using unstructured data (such as analyzing the audio tone of CEO earnings calls) to automated execution.

Second, the committee discussed a compelling study titled "What if you had a crystal ball?" The research demonstrated that even when professional fund managers were given the next day’s financial headlines in advance, they failed to significantly outperform the market. Human biases leading to excessive leverage or timid positioning often negated the advantage of perfect information. This reinforces our conviction that disciplined, systematic exposure is superior to discretionary market timing.

Sentiment in a New Era: Prediction Markets

Finally, the discussion touched upon the rising utility of prediction markets, such as Polymarket and Kalshi, as tools for gauging real-time sentiment. Unlike traditional polling, these platforms represent capital-backed probabilities ("skin in the game") regarding macroeconomic events, from interest rate cuts to geopolitical shifts. The committee views these as increasingly valuable data sources for understanding public consensus and identifying potential market dislocations.

Conclusion

The Investment Committee concludes 2025 with a constructive yet vigilant stance. We recognize that attempting to time the market or exit equities due to valuation concerns is historically a losing proposition.

Therefore, our mandate for the upcoming quarter is twofold:

1. Maintain Equity Exposure: We remain invested, with a tilt toward the structural winners of the AI cycle, particularly in energy and infrastructure sectors that support the physical build-out of the technology.

   
   

2. Manage Duration Risk: Given the bear steepening in bond markets, we are exercising caution regarding long-duration fixed income, preferring assets that are less sensitive to the volatility currently plaguing the long end of the yield curve.

Authors: Kostas Metaxas, Yiannis Sapountzis and Kostas Asimakopoulos