Investors should consider stepping into equities linked to countries that are the first to raise interest rates, Bank of America Merrill Lynch's chief global equity strategist said on Wednesday.

While the notion of rising rates has recently caused investor worries that governments could be shutting the tap on stimulus measures too early, BofA Merrill's Michael Hartnett said such credit tightening reflects room for further growth.

Investors have been skittish about Australia and China, for instance, due to worries that tighter credit could choke economic growth. But Hartnett says the moves to tighter monetary policy in those countries is a signal of the vitality of their economies.

You have to ask yourself do you want to be overweight countries where interest rates do go up. Or do you want to be overweight countries where they don't go up, Hartnett told an industry conference held by BofA Merrill, a unit of Bank of America Corp.

Our feeling is you want to be overweight countries where they do go up. The countries where they do go up are countries where they can go up. The countries where they can go up are countries where they have healthy balance sheets, sustainable growth to cope with rising interest rates.

Hartnett said the general outlook for global equities this year is positive. His target for the MSCI All Country World index <.MIWD00000PUS> is 350, roughly a 15 to 20 percent rise from the start of the year.

With no major threat of a double dip recession and governments remaining largely biased toward stimulus, there is room for equities to go higher, he said.

Sheryl King, head of Canada economics and chief strategist for BofA Merrill, said she sees the Toronto Stock Exchange's S&P/TSX composite index <.GSPTSE> rising to 13,000 at the end of 2010. It was trading around 11,360 on Wednesday.

In the near term, before the Bank of Canada actually starts raising rates, I'm actually still very bullish on the cyclical sectors, she said.

Once the central bank starts to raise interest rates, which is widely expected to occur in the second half of 2010, cyclical plays may struggle a little bit more, but not enough to clampdown on broader gains, she said.

I do not expect them (Bank of Canada) to go into tight policy, restrictive policy. So all the way along they're just going to be removing stimulus, which is still good for equities. It means we will still get a robust recovery, good revenue growth, there's a lot more upside, King said.

(Reporting by Jennifer Kwan; editing by Peter Galloway)

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