Ignore the pessimists, equities are going up. Here's why

Peter Garnry of Saxo Bank is very optimistic when it comes to the future. Innovation is making things better for humanity, and Garnry thinks it's also makes things better for investors, because it pushes up the equity-risk premium "significantly".

The chart below shows the S&P 500 performance (excluding dividends) since 1927. Performance is on a log scale - each jump from one integer to the next is a doubling in total return.

(Saxo Bank)

It’s pretty obvious that betting on private-sector innovation works out well. But for how long?

As far as Garnry's concerned, the number of new ideas being realised is accelerating. Technology, education, healthcare - just think what’s being developed at the moment: self-drive (and other electric) vehicles, drones, GM crops, robotic limbs (among a host of other things), nanotech, biotech, 3D printing, hybrid clouds, wearables, AI… to name but a tiny portion.

This means that people will be healthier and wealthier, and the global economy is becoming more integrated through technology and trade.

For example, take 3D printing: last month General Electric announced it's going to print fuel nozzles in one piece (3D of course) rather than assembling 20 different components.

And Not Impossible - a nonprofit that provides an open-source, DIY platform to solve health issues with technology - has set up a 3D-printing prosthetics lab in the Sudan.

An acceleration in innovation also means an acceleration in market opportunities, owing to population growth and freer economies.

Garnry says:

I would bet on equities long term because I believe in the future of innovation.

Keeping innovation constant entails risk taking to get them into commercial applications. That needs equity capital and savers to fund projects. If things go well, rewards are huge.

Historically, says Garnry, the pay-off has been greater than the more predictable, less risk returns offered by government bonds. This spread is known as the equity risk premium.

Investors are rewarded for taking risks; betting on innovation may well be the risk worth taking.