A change in the weather could spark a change in fortune for your portfolio

Britain's cold snap may have chilled people caught out by the inclement weather, but it has warmed the hearts of investors in companies such as energy suppliers and retailers. The official onset of winter has sent energy prices - as well as some energy stocks - soaring, as investors have begun preparing themselves for what is forecast to be the coldest winter in a decade.

While the changing of the seasons is clearly no surprise to anyone, new weather patterns often are - and shares in energy companies usually respond quite sharply to an sudden change in the climate. For investors who get their timing right, there's money to be made.

Robin Batchelor, the fund manager of Merrill Lynch's World Energy fund, says that, by the start of this month, many investors had become nervous about the continued mild weather, leading the share prices of several energy stocks to fall slightly. However, over the past week, as the cold snap finally arrived, investors had once again repositioned themselves as a result.

"Certainly, in the energy funds we run, we have tweaked the portfolio to take advantage of the weather recently," he says. "We don't let the weather drive the portfolio, but you can't ignore it."

Batchelor adds that the onset of winter tends to move the market every year. "It can last anything from one to three months," he explains. "There's usually a pull-back before the rise, and then the market can increase anywhere from 10 to 25 per cent."

This month alone, the price of natural gas has risen more than five times in London, most of the move coming this week. Oil and coal prices have also been in the ascendancy as traders have begun to speculate that a shortage in UK gas supplies this year may force some industries to turn to alternative sources of energy.

As a result, almost all energy stocks have been on the climb over the past week, with companies such as Tullow Oil, BG Group and Dragon Oil gaining between five and 10 per cent in just a few days.

Batchelor issues a word of warning, however. "Normally, the main companies you would go for are the likes of Tullow Oil or British Gas," he says. "But we've avoided them this time, as we're a bit concerned the Government may change the tax on them."

John Kelly, the head of client investment at Abbey is another who is worried about the prospect of a windfall tax being imposed on the energy sector at next month's pre-Budget report.

"The weather has an impact on psychology," says Kelly. "Energy companies become villains as people's bills go up, so there's a chance that the oil and gas industry could suffer. Gordon Brown might say, 'here's a big industry making lots of profits - let's tax it more'. But if you take a £1 off BP's profits, that's £1 less they can spend in exploration."

Batchelor says that, as a result, he has turned his attention to the US in recent weeks, taking profits in many of his UK positions to avoid being caught out by an energy windfall tax which could take a heavy toll on the share prices of British energy stocks. Companies he currently favours stateside include EOG, Ultra Petroleum and XDO Energy.

Proving the point that the weather is a serious business for professional investors, Batchelor is able to instantly reel off a detailed weather report and forecast for the US, explaining that the north-east of America has finally just had its first bout of cold weather this week after a prolonged mild spell. He says this should be good news for his portfolio of US gas stocks.

Although energy is one of the most obvious sectors to be affected by changes in the weather, it is not the only one. With many industries increasingly dependent on either warm or cold spells, to boost their businesses, it is no longer unusual for companies to thank or blame the weather as they issue an upbeat trading statement, or even a profits warning.

John Lewis, for example, last week boasted that its sales for the week to November 19 were up some 5.8 per cent on the same period last year - not what had been expected given the recent consumer slowdown. According to the group, the cold snap had driven customers out in their droves to buy new jumpers, coats, hats and the like - helping the department store to a near record week of sales.

Hilary Cook, the director of investment strategy at Barclays Stockbrokers, says that John Lewis is not alone: "Burberry's already said it welcomes this cold snap, as it's selling thousands of pink duffle coats. What retailers always want is an early cold winter and an early warm summer - so they can sell their new season's stock."

Maureen Hinton, a retail analyst at Verdict, adds that the cold weather has not just been good for sales, but for profit margins as well. "The fact it has got colder over the past few weeks has been very good for retailers, as people have thought, 'I must get out there and buy some knitwear, or a new coat now', rather than waiting until the January sales, which would hit retailers' margins," she says.

Internet sites are also often among a group of businesses to cheer when a cold snap sets in. Party Poker, the internet gaming company, recently said it believed more people would stay home and use its websites when the weather was bad, while internet retailers believe consumers are more likely to do their Christmas shopping online if conditions are wet, cold and miserable.

From a negative perspective, Abbey's John Kelly points out that insurers can be hit particularly hard by a harsh winter, as they see an increase in claims for burst pipes or storm damage. Those insurers which are heavily exposed in the southern United States and the Caribbean are also dependent on the extent of the hurricane season which affects that region every year between August and October. Hurricane Katrina this year was the costliest ever for the insurance industry, and brought a small handful of insurers, who had not reserved adequately, to their knees.

Cook echoes Kelly's warning that the cold weather is, in fact, more often a bad thing for businesses than a positive, highlighting that the sharp increase in energy bills will ultimately have a knock-on effect to consumers' disposable income.

In practice, speculating on the weather to make your gains on the stock-market is a relatively risky business - certainly at a stock-specific level. Furthermore, investing directly in commodities is no easy business, unless you're willing to get involved in what is a high-risk world of derivatives trading.

However, following funds such as Merrill's World Energy may be a good way to cash in if you feel particularly strongly about where the weather is going over the coming months.

Winners and losers in a cold winter

* Energy companies: demand for extra heating buoys profits at gas and electricity suppliers, which pass on increases in the cost of fuel to customers. However, the predicted creation of a windfall tax on energy companies threatens share prices this winter.

* Retailers: unexpected cold weather may make people reluctant to leave home, but shops selling coats and other cold-weather gear can cash in. Retailers tend to benefit from an early change of season, so they can shift their newest stock.

* Online companies: businesses that trade over the internet are well-placed to cash in if people spend more time at home due to the bad weather.

* Insurers: bad weather leads to a rise in claims on home and motor insurance policies, which is bad news for investors in insurance companies. Extreme weather, such as this summer's hurricanes in the US, can have potentially disastrous effects on insurers' profits.

* Pubs: often blame a cold summer for a downturn in trading. Good weather tends to encourage more people to take refuge in beer gardens.

Shares to check out

* BG Group, which was spun out of British Gas, has seen its shares rise almost 10 per cent since mid-November.

* Shares in Dragon Oil, an energy companywhich taps the resources of Turkmenistan, rose more than 21 per cent in the days following the start of Britain's cold snap.

* Tullow Oil, which focuses on gas and oil production in the UK and West Africa, climbed more than 16 per cent in just 10 days this month.

* Shares in Hanover Re, the reinsurer fell more than 16 per cent in the weeks following hurricanes Katrina and Rita this summer.