Why the ‘outlook presents challenges’ for Zip shares: expert

The Zip Co Ltd (ASX: ZIP) share price is avoiding the worst of a brutal sell-off today. Though, the bigger picture potential for this ASX buy now, pay later (BNPL) share could be unflattering.

Amid the broad and heavy selling, Zip shares are currently down holding their ground at 69 cents apiece, the same as Friday’s closing price.

For comparison, the benchmark index is suffering its third consecutive day of nosediving. At the time of writing, the S&P/ASX 200 Index (ASX: XJO) is off-kilter by 1.33% although it’s been down more than 2% this morning.

But let’s take a look at where Zip shares could be heading on a longer time horizon.

Tightening the belt

Before we get into the nitty-gritty on Zip, let’s zoom out to the macroeconomic level. Last week, the United States Federal Reserve announced yet another rate hike. Once again, the Fed opted to jack up interest rates by 0.75% — taking the headline rate range to between 3% and 3.25%.

Following the call, some economists are forecasting our local central bank — the Reserve Bank of Australia (RBA) — will lift rates by 0.5% in October. Such a decision would take Australia’s target cash rate to 2.85%, the highest it will have been since June 2013.

The persistent rate rises are being made in a bid to stifle inflation as consumer purchasing power continues to be eroded. That means the RBA is actively trying to dampen consumer sentiment.

In turn, retail-focused ASX shares — such as Zip — could see diminished enthusiasm as investors stay mindful of this headwind.

What do experts think of Zip shares?

Seneca Financial Solutions senior investment advisor Arthur Garipoli believes Zip shares are a sell amid the rising rates. Providing his perspective on the BNPL company in a recent post on The Bull, Garipoli said:

The outlook presents challenges in a tough economic environment.

Furthermore, Garipoli is not alone in his caution toward ASX shares tied to discretionary consumer spending. Portfolio manager for Ophir Asset Management Andrew Mitchell recently spoke to The Australian on the topic of inflation and shares, stating:

We are very cautious on consumer discretionary companies, companies leveraged to the housing market or financials. We feel they are the most vulnerable to an earnings downgrade cycle.

While Zip is yet to indicate a deterioration in its business, Zip shares have suffered a dizzying 84% fall so far this year.

The post Why the ‘outlook presents challenges’ for Zip shares: expert appeared first on The Motley Fool Australia.

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More reading

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• 8 ASX 200 shares got kicked out of the index on Monday. How are they tracking?
• Why Imugene, Link, Newcrest, and Zip shares are dropping
• Guess how many companies in the ASX 300 actually make no money
• The ASX 200 is getting a shakeup today. Here’s the tea

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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