The Bank of Canada raised interest raised interest rates on Wednesday for the first time in seven years. Investors say that higher rates will weigh on bonds. But they expect a combination of only gradual rate increases and solid economic growth to support stocks.

"Stronger growth and slowly rising interest rates creates positive value for equities ... it's at the root of our preference for equities over fixed income," said Candice Bangsund, vice president, global asset allocation at Fiera Capital Corporation.

She is buying energy, materials and financials, which together make up nearly two-thirds of the S&P/TSX composite index <.GSPTSE>.

Canada's benchmark index has doubled from its financial crisis trough in 2009 even after it has underperformed many other major markets this year as prices of oil, one of the country's major exports, fell.

Still, investors say that the rally in stocks can continue and look to those sectors that will benefit most from a rosy growth outlook.

"We have quite a few information technology names ... the valuations can look scary but the growth really has been impressive, said Ian Scott, equity analyst at Manulife Asset Management.

Scott likes Kinaxis Inc and Shopify Inc whose fast growth and international expansion leave them less sensitive to higher rates.

The Bank of Canada has projected that Canada's economy will expand by 2.8 percent this year and that global economic growth will pick up to 3.4 percent.

The improved growth outlook can help support Canadian industrials, said Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada, who is most bullish on overseas stocks due to attractive valuations.

But companies with high debt loads and a lot of refinancing to do in the next couple of years should be avoided, said David Rosenberg, chief economist & strategist at Gluskin Sheff & Associates Inc.

He is also wary of sectors of the economy that could be hurt by a stronger Canadian dollar, such as exporters of auto parts and transportation.

The loonie has surged more than 6 percent since the Bank of Canada turned hawkish in June.

A rising rate environment tends to increase net interest margins of banks. But some investors say that a slowdown in Canada's housing market will weigh on bank shares.

"We do think that real estate is at the point now of inflection," said Sadiq Adatia, chief investment officer at Sun Life Global Investments. "We think that the rate hike will be a damaging (for the economy) at some point down the road."

Adatia favors increased allocation to international stocks and is buying bonds to add some defensiveness to his portfolio.

He favors debt with a shorter maturity, which tends to be less sensitive to movement in interest rates, but also likes to take the extra risk of owning corporate rather than government debt because global economic growth is solid and it enhances return.

(Reporting by Fergal Smith; editing by Grant McCool)

By Fergal Smith