Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Sifting through the ruins of the BNPL sector
The buy-now, pay-later (BNPL) sector was absolutely smashed in February, amid a broad-based market rout. The sell-off came on the back of a potential rate rise in March, regulatory scrutiny, war in Ukraine and the release of the latest Federal Open Market Committee (FOMC) meeting minutes. The main reason for the brutal sell-off in the BNPL sector boils down to interest rates.
BNPL companies offer credit to consumers to fund small purchases without charging interest. These services boomed during the pandemic as people began shopping online for consumer discretionary goods and used a BNPL service to make payment. Low interest rates were what supported the sector and underpinned valuations of high-growth stocks.
Afterpay revolutionised the credit service services sector by creating a business model built on charging merchants a transaction surcharge and customers late fees. By not charging interest payments, it allows BNPL players to offer these services without being subject to strict credit regulations.
This interest-free lending BNPL business model will face its biggest test when the US Federal Reserve raises rates by 50 basis points in March. It ends the pandemic era of cheap credit. The reason being that BNPL operators finance their loans to consumers via the benchmark floating rate plus a variable fixed margin.
The cost of borrowing is set to rise with any US Federal Reserve rate rise. Besides Afterpay, the remainder are all early-stage growth companies that are bleeding cash. So, the question is, are they cheap enough to buy?
According to an Australian Financial Review article, the chief financial officer of US fintech company Affirm, Michael Linford said, “for every 100 basis points (that is, 1 per cent) of rate movements beyond the current forward curve, its gross profit margin could fall 40 basis points as a measure of revenue, less transaction costs, as a percentage of gross merchant value.”
That’s a sobering thought for BNPL investors. Despite lofty valuations, BNPL players are bleeding cash and not turning a profit. It’s a crowded space and there’s no rush to buy-in just yet.
