Navigating Kenya's PMI Deterioration: Finding Resilience in Agriculture and Tech-Driven Sectors

Kenya's private sector Purchasing Managers' Index (PMI) has shown a mixed trajectory in early 2025, hovering above the 50-threshold for expansion but grappling with subdued business sentiment. While the April 2025 PMI hit a 27-month high of 52.0, driven by surging customer demand and stronger output in agriculture, construction, and services, sectors like manufacturing and wholesale/retail remain under pressure from inflation, currency volatility, and weak consumer spending. Amid this cyclical slowdown, investors must look beyond headline numbers to identify resilient sub-sectors and structural growth drivers.

The Deterioration Drivers: Inflation, Currency, and Demand

The PMI's uneven recovery reflects three key challenges:

1. Inflationary Pressures: Despite moderating input cost growth in Q2 2025, Kenya's inflation remains elevated, driven by food and energy prices. The central bank's policy rate cuts—now at a five-year low—aim to stimulate demand but risk further weakening the shilling. Currency depreciation, already down 12% against the dollar in 2023, amplifies import costs for raw materials and fuels, squeezing margins in manufacturing and retail.

2. Consumer Caution: Households and businesses have delayed discretionary spending amid economic uncertainty. New orders in services and wholesale/retail sectors grew at the slowest pace in months in January 2025, highlighting weak demand.

3. Structural Challenges: Cartels inflating prices of essentials like fertilizer and cooking oil, coupled with funding shortfalls for critical infrastructure projects, have prolonged sectoral imbalances.

Resilient Sectors: Agriculture, Logistics, and Fintech Lead the Way

While manufacturing and retail lag, three sub-sectors are demonstrating resilience:

1. Agriculture: Pricing Power and Value Chains

Agriculture is a standout performer, benefiting from strong demand for staples like maize and coffee. The sector's output grew sharply in Q2 2025, supported by favorable weather and export opportunities. Companies with exposure to agricultural value chains—such as fertilizer producers, irrigation equipment providers, or digital platforms connecting farmers to markets—could thrive.

Investment Thesis: Look for firms with pricing power to offset input costs and those integrating into global supply chains (e.g., tea or horticulture exporters).

2. Logistics: Supply Chain Efficiency in a Volatile Environment

Logistics firms are critical to Kenya's trade-dependent economy. With the trade gap widening to a 19-month high, companies optimizing last-mile delivery, cold storage, or cross-border transport could see demand. The PMI's April surge was partly fueled by increased purchasing activity in construction and agriculture, requiring robust logistics support.

Investment Thesis: Prioritize logistics firms leveraging technology (e.g., route optimization software) or with scale in regional markets.

3. Fintech: Mitigating Cash Flow Risks

Digital financial solutions are gaining traction as businesses seek tools to manage liquidity. Fintech platforms offering SME loans, payment gateways, or blockchain-based trade finance could fill gaps left by traditional banks, which face elevated non-performing loans.

Investment Thesis: Back fintech startups with strong partnerships (e.g., mobile money providers) or those addressing niche needs like micro-insurance for farmers.

Structural Growth Drivers: Urbanization and Tech Adoption

Despite short-term headwinds, two long-term trends remain intact:

1. Urbanization: Kenya's urban population is growing at 4% annually, driving demand for housing, infrastructure, and consumer goods. Construction's PMI strength in Q2 2025 underscores this, with firms expanding capacity to meet demand.

2. Technology Penetration: Digital adoption in Kenya is among the fastest in Africa. E-commerce, mobile banking, and renewable energy solutions (e.g., solar home systems) are reshaping consumption patterns.

Investment Strategy: Focus on Resilience and Long-Term Themes

Investors should adopt a multi-pronged approach:

• Sector Selection: Overweight agriculture and logistics stocks while underweighting traditional manufacturing.
• Theme Alignment: Prioritize firms exposed to urbanization (e.g., construction materials) and tech-driven efficiency gains (e.g., logistics SaaS providers).
• Risk Mitigation: Seek companies with pricing power or hedging mechanisms against currency fluctuations.

Example Plays:
- Agricultural Value Chains: Firms like X (hypothetical example of a Kenyan agri-tech firm) with digital platforms linking farmers to global buyers.
- Logistics: Y (a regional freight operator leveraging IoT for route optimization).
- Fintech: Z (a mobile payment startup expanding into SME lending).

Conclusion

Kenya's private sector faces near-term hurdles, but its structural growth drivers—urbanization, tech adoption, and agricultural potential—offer fertile ground for selective investments. By focusing on sectors and companies that can navigate inflation and currency volatility while capitalizing on long-term trends, investors can position themselves to benefit as Kenya's economy stabilizes and grows.

The PMI's April rebound hints at underlying resilience, but success will hinge on identifying companies that aren't just surviving the slowdown but are building for the next cycle.