As the economy in the European Monetary Union has improved, the MSCI Germany Index (“German Equities”) has delivered relatively strong returns for the first three quarters of 2013—almost 17%. While this hasn’t quite matched the pace of the S&P 500 Index, it has outperformed the MSCI EAFE Index for this period.1 Of course, the real question regards what the current valuations suggest are the prospects for German Equities going forward. Our research says that German Equities are reasonably priced and attractive based on the historical patterns.

Evaluating the Historical Context

German Equities have a history going back to December of 1969 and encompassing a variety of market environments. Our goal is, therefore, to construct a framework allowing us to analyze the valuation levels of German Equities over a period of approximately 42 years. While one can never know future performance with certainty, we believe that it is useful to examine valuation levels and how they have coincided with past returns.

Year-End Dividend Yield as a Potential Valuation Indicator

We believe that the dividend yield for German Equities is an important indicator of their valuation. In fact, as of September 30, 2013, more than 97% of the market capitalization of these stocks had paid at least one dividend over the prior 12 months, indicating that dividend payers make up a large majority of the market.2

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