It was an eight-line statement from a UK small-cap budget footwear maker but Shoe Zone’s (SHOE:AIM) latest profit warning tells a much bigger story about the way global trade and supply chains could be changing.

The company has been hit by rising container prices as shipping routes have been disrupted, largely thanks to attacks perpetrated by Houthi rebels in the Red Sea. Vessels are rerouting away from the Suez Canal and this is pushing up costs for businesses like Shoe Zone, for whom upwards of 80% of its products are manufactured in China.

Notably, LED lighting specialist Luceco (LUCE), which also has a significant chunk of its manufacturing in China, saw its shares fall in sympathy with Shoe Zone’s warning.

In the short term this is a reminder that inflationary pressures continue to exist in the global economic system, perhaps helping to explain central banks’ relative caution over rate cuts.

Longer-term though it plays into the idea of deglobalisation, with the rise of populist political movements and increased geopolitical tensions affecting global trade and leading to more ‘reshoring’ with countries expanding their own manufacturing capacity.

Recent work by academics at the London School of Economics suggested claims of deglobalisation were overdone, at least during the period between 2000 and 2021, although there is evidence of reduced direct trade with China in the US through 2023. The authors of the study, Guy Erb and Scott Sommers, observed that the introduction of the IRA and CHIPS acts with their ‘Buy-America’ provisions had some impact.

At the very least, investors probably need to consider if the old model of producing goods in low-cost manufacturing centres across the globe and then shipping them to domestic markets is still viable, particularly for consumer-facing firms operating at the value end where there is limited scope to pass on increased costs to customers without fatally undermining said value credentials.

In our main article this week we discuss how a combination of attractive valuations and the potential for a measure of political stability to return to the UK makes now a great time to take a look at FTSE 250 stocks.

And it seems we’re not alone in thinking UK mid caps might be an attractive hunting ground. According to Bank of America sentiment towards UK small- and mid-cap stocks recently showed the first sign of improvement in 2024 with UK-focused equity funds benchmarked to the FTSE 250, FTSE Small Cap and FTSE AIM All Share indices seeing their first weekly inflows this year (and just the sixth since 2022) of $100 million.

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