Trade sourcing

No Logo was a siren call to antiglobalisation. For trade sourcing companies, it's a fundamental reason to load up on their stock. In a recession, consumers tend to trade down to less expensive alternatives. No one knows this more than retailers, which tend to stuff their shelves with own-brand products – at a discount of at least 20 per cent – alongside the big brands. That plays to the strengths of supply chain managers, which can direct their vast networks of factories to pump out more private label jeans and T-shirts.

This is the new, more prosaic reality for Li & Fung, the world's largest supply chain specialist. In recent years it rode a wave as western brands and retailers shifted production out east without really knowing what they were doing. Based in the entrepôt of Hong Kong since 1937, the company filled the knowledge gap. Revenues and net income more than tripled this decade. Now, as debt-fuelled consumerism enters a sticky patch, Li & Fung is hoping its basic pitch – better goods, for less – is even more compelling.

That is a risk. Outsourcing the sourcing of small-ticket items makes sense, intuitively. But price deflation is tightening its grip in China, which accounts for just over half of revenues – and thus commissions. The company is budgeting for flat organic revenues this year, when most of its customers expect 5-10 per cent declines. That is quite a stretch while global demand is sluggish: clothing sales in Hong Kong, for example, were down almost 7 per cent in the first two months this year. Other targets, such as lopping 10 per cent off the cost base in 2009, are similarly ambitious.

The combination of a cash-rich balance sheet and a 6 per cent yield remains attractive. But this year's strong rally in Li & Fung's shares – up 48 per cent, against a flattish local benchmark – has probably gone far enough.