How are Zip shares faring on their first day outside the ASX 200?

Higher interest rates are bad news for companies priced with future earnings in mind.

Key points
  • The Zip share price is in the red today
  • Today is the first day the ASX BNPL share is trading outside of the ASX 200 index
  • Investors may also be concerned about a potential outsized interest rate hike from the US Fed this week

The Zip Co Ltd (ASX: ZIP) share price is down 1.83% in early afternoon trade on Monday.

Zip shares closed on Friday trading for 82 cents and are currently trading for 80.5 cents apiece.

With the benchmark indexes broadly flat at the time of writing, the ASX buy now, pay later (BNPL) share is underperforming on its first day of trading outside the S&P/ASX 200 Index (ASX: XJO).

A boy with sad eyes pulls the zip over his mouth and nose while doing up a large jacket where the collar stands up at head height.

Image source: Getty Images

What are ASX investors considering today?

There look to be two factors throwing up some headwinds for Zip shares today.

First, as mentioned, today is the first day the stock is trading outside of the ASX 200.

That came as part of S&P Dow Jones Indices September quarterly review.

With Zip shares having suffered a horror year, down 82% in 2022 so far, the company's market cap has fallen to $561 million, no longer qualifying it among the top 200 listed companies.

Getting ousted from the ASX 200 could hamper the BNPL stock, in part because many fund managers are restricted to trading shares listed on the blue-chip index. Those fund managers still holding shares now may find themselves having to sell Zip while others will not be able to snap them up.

Investors are also likely eyeing the upcoming interest rate decision by the US Federal Reserve.

The Fed board will announce its decision on Wednesday (early Thursday morning Aussie time).

Following an uptick in August's inflation figures in the world's largest economy – while economists had largely been forecasting a downturn – analysts now predict the Fed will continue to hike rates aggressively to tame fast-rising prices.

Higher rates are bad news for loss-making companies like Zip, which are priced with future earnings in mind. As interest rates climb, so too does the cost of those future earnings. Higher rates will also pressure Zip's customers and could see an increase in the level of bad debts the company is already struggling with.

How have Zip shares performed longer-term?

Although Zip shares are up 83% from their 23 June lows, the stock remains down a painful 88% over the past 12 months. That compares to a 7.8% loss posted by the All Ordinaries Index (ASX: XAO), its new benchmark index.

Motley Fool contributor Bernd Struben 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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