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Market wrap: Is the party now over for Afterpay and Zip Pay?

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With the strong rise of Afterpay and Zip Pay along with the Latitude IPO that was withdrawn last week, the interest in the buy now pay later space has exploded.  So, is this model really good for consumers and should investors continue to get caught up in the hype?

There is no doubt that this space has been heavily reported on in the media over the past two years with the news being positive for both investors and consumers alike.

But have we really dissected this model to decide if it is in the best interests of consumers. In other words, is this method of payment the real deal or are we being fooled by their clever marketing tactics?

If I search online, I can easily apply for a credit card with a minimum limit of $500 with an interest free period of up to 55 days and an interest rate as low as 9.89%.

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When looking at offers in the buy now, pay later space, however, merchants such as Afterpay currently require users to repay their purchases fortnightly over four repayments. But if the user misses a payment, they are required to pay some pretty hefty late fees.

According to their terms, for each order below $40, a maximum of one $10 late fee may be applied per order and for each order of $40 or above, the total of the late fees that may be applied are capped at 25% of the original order value or $68, whichever is less. The important point to note is that the charge is for per order.

So in reality, the offer by Afterpay can actually end up costing you much more than applying for an interest free credit card, particularly as it is common knowledge that consumers do not pay off their interest free loans.

Given that the buy now, pay later space has become very attractive for millennial's, in particular, in my opinion, we are simply creating another generation of people living from pay cheque to pay cheque. In other words, they are being encouraged to spend rather than save their money for the future.

And like any line of credit option, they have the potential to damage the credit score of the consumer and affect their ability to get a loan, with many not really appreciating the downside risk of these facilities.

So is the party well and truly over for the companies in this space?

In my view, the more these companies grow, the more attention they will attract from the regulators, such as ASIC and the ACCC, which will see the costs of compliance rise among many other things.

While I think there is still value in this sector, now is the time to acknowledge that every pot comes to the boil at some point in time and I believe the buy now pay later space is getting really close.

Looking at the Australian sectors this week, after being the worst sector last week, Materials has risen nearly 2% to lead the market, although this could just be a short term rise in the sector, so sit tight and wait.

Energy has continued its rise with Industrials not far behind as both are up more than 1.5% so far this week.  Information technology was, once again, the worst sector falling more than 3.5% so far this week, with Communication Services and Consumer Staples also weak, down more than 1%.

Looking at the ASX top 100, CYBG has continued to rise and is up more than 10% so far this week and more than 45% over the past three weeks.

Once again, I caution investors as this is most likely a false rally given how far the stock has fallen previously. JB Hi-Fi has also continued its strong rise, up more than 7% with Oz minerals and Whitehaven looking good, both up more than 6%.

What's next for the Australian stock market

The Australian market is displaying lots of indecision this week, and while it has technically traded up, it has been far from convincing.

Regular readers will know I expected the market to fall into a low by now, yet it is holding up although it is still trading below the high that occurred on September 20, and the all-time high on July 30.

This type of pattern indicates that while the market it is not strong, it is also not weak. That said, I still expect the market to pull back this month or next month into the yearly low.

Given that it has not fallen as yet, it is possible that the low may occur later than I expected, with the fall unfolding by the third week of November with my price target remaining unchanged. Consequently, we should see it fall to between 6400 and 6200 points before turning to rise up into 2020.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.
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