You can cut all the flowers, but you cannot keep spring from coming.(Podrán cortar todas las flores, pero no podrán detener la primavera.) - Pablo Neruda
You can cut all the flowers, but you cannot keep spring from coming.(Podrán cortar todas las flores, pero no podrán detener la primavera.)
Last week’s note focuses on commodity prices themselves. The key takeaway is that commodities have been firming even as they remain peripheral to dominant market narratives. That disconnect matters less for inflation and more for where commodity cycles surface first.
Commodity cycles tend to show up in earnings before they show up in equity prices. In this context, the focus is on industrial commodities, using the CRB Raw Industrials Index, which tracks metals and other raw industrial inputs while excluding energy. Changes in commodity prices flow directly into revenues, margins and cash generation for firms tied to materials, mining and industrial inputs. Equity prices often respond later, filtered through valuation and prevailing factor preferences.
Latin America is one of the clearest places to observe this transmission. The region’s equity markets are concentrated in materials and extractive industries that form the earnings base. Compared with broader emerging markets indices, sector composition allows commodity dynamics to show up more directly in earnings.
Historically, Latin American earnings have tracked the commodity cycle closely. The chart shows earnings moving in step with commodity cycles over time. When commodities accelerate, earnings respond quickly and forcefully. When commodities stall or reverse, earnings follow. This behavior reinforces the region’s role as a direct conduit for commodity dynamics rather than a diversified growth story.
The past offers useful perspective. When commodity cycles have aligned with supportive macroeconomic and capital flow conditions, Latin American equities have moved far and fast. When those conditions fade, the region can underperform for extended periods.
The last decade has been defined by a distinct regime. Global equity leadership has concentrated increasingly in the United States, driven by technology, duration-sensitive growth and mega-cap concentration. U.S. equities now represent roughly 47% of global market capitalization, up from closer to one-third through much of the prior two decades.
That concentration has consequences. As capital crowds into a single geography and factor set, other regions recede from portfolios, attention and benchmarks. Latin America’s relative neglect over this period reflects this dynamic as much as any region-specific weakness.
What stands out today is not that this linkage exists, but that relative equity prices have only begun to reflect it. While Latin American equities have outperformed recently, that move represents a small reversal relative to the depth and duration of the preceding underperformance.
Underownership acts as an amplifier in these environments. The MSCI Emerging Markets Latin America Index represents less than 1% of the MSCI All Country World Index by market capitalization, and only a modest share even within emerging markets, despite the region’s outsized exposure to real assets. In that context, incremental attention can have an outsized impact.
The broader lesson is that focusing on commodity prices alone misses how commodity cycles actually propagate through markets. Spot prices move headlines, but earnings determine durability.
For investors focused on where cycles are forming rather than where leadership has already concentrated, the linkage between commodities and Latin American earnings remains one of the cleaner signals available. Commodity cycles work through earnings first, with markets often adjusting only later.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
