The US Federal Reserve indicated that interest rate increases are around the corner in order to curb rising inflation. It may also be “appropriate” to reduce the size of the Fed’s balance sheet soon after increasing the interest rate, according to some members of the Federal Reserve committee. The committee also said that it would wind down the bond buying program faster than outlined in the November meeting. Economists and investors are now thinking that US interest rates could start rising in March 2022, particularly as the Federal Reserve officials all expect that interest rates would rise in 2022, rather than just half of the officials as was the case before. One of the main concerns is that the Omicron COVID variant could actually lead to further increases in house prices, rent, wage growth and more supply chain issues in the US.
Higher interest rates would be a problem for Afterpay. It doesn’t exactly have huge margins and an increase in the interest rate could see a narrowing of the Afterpay profitability. On top of that, higher interest rates theoretically hurt the valuations of most businesses.
Comparing Afterpay’s stock chart to its peers, the recent underperformance has been prevalent in the entire BNPL sector. Ever since the highs of February 2021, the bnpl sector has lagged. While the afterpay share price recovered with the Square acquisition, recent performance has resulted in a massive discounting. Afterpay shares trade at $71.85 a share – setting a new 52-week low.
Afterpay shares maybe negatively affected given how interest rates may affect the share price. The increase in volatility in markets may also fend off investors from risky sectors such as the BNPL. However, BNPL heavyweights are now trading at shashed valuations with high growth expectations.