As we move into the second half of 2014, it is safe to say that this has been a year of confounded expectations.

The consensus view at the start of the year forecast a mild market correction in many parts of the developed world, while the emerging market nations would show improvement based on a strengthening global economy. Instead, while the emerging markets did gain some steam in the second quarter, they languished in the first quarter, even as the markets of developed nations continued pushed up to new highs.

Bonds have also proven another head-scratcher so far. With the 10-year Treasury ending 2013 at just over 3%, no one was expecting the yield to give up ground and fall back to today’s 2.5% as the Fed scaled back its program of bond buying.

The markets continue to send mixed signals on the world’s central banks’ massive easing measures. These include the European Central Bank’s negative real interest rate, the Bank of Japan’s $68 billion monthly bond purchases, and the US Federal Reserve likely to remain accommodative well into 2015 even as it tapers its own asset purchases. Bloomberg data shows that the average yield on global developed sovereign bonds has fallen from about 1.7% at the end of last year to about 1.3%, while the yield on global investment-grade corporates has fallen from around 1.06% to 0.9%. At the same time, the PE ratio on the MSCI All-Country World Index has changed from about 16.75 at the end of last year, to about 15.75 at the beginning of this year, to 17.8 today.

Making sense of this is the equivalent of reading tea leaves at the bottom of the Mississippi River after a heavy rain. Welcome to the world of global unconventional monetary policy.

So, what to do for the rest of the year? The best bet now will be to take a cautious approach.

With bond yields still down, fixed income doesn’t look hugely attractive. After the frenzied search for yield over the past few years, even most emerging market bonds aren’t offering enough yield to counteract increased internal political and geopolitical risk. While I have difficulty imaging any direct military conflicts developing over the next six months, with Russia trying to deter its former satellite states from aligning too closely with Brussels, and China continuing to press territorial claims across the East and South China Sea, tensions are clearly on the rise. The fact that the top command at the North Atlantic Treaty Organization (NATO) is pushing its member states to increase defense spending is a rather ominous sign since most observers have considered NATO largely irrelevant after the Cold War.

Stretching equity valuations also pose a challenge, though on that score emerging markets are relatively more attractive with some exceptions. For instance, in this issue’s Portfolio Update, I’m selling iShares MSCI Malaysia Index Fund (NYSE: EWM) as its forward PE ratio has risen well above its historical average even as corporate earnings growth in the country has slowed.

When it comes to the emerging markets, investors will be best served by focusing on smaller emerging nations which continue to show respectable growth as domestic consumption continues to grow. We’ve been seeing that theme play out since about April, when frontier markets overtook the S&P 500 and the MSCI Emerging Markets Index as the top performer year-to-date and have been expanding their lead since. A prime example of that, despite its butting heads with China, is Market Vectors Vietnam ETF (NYSE: VNM) which is up by more than 13% this year.

I also think Europe continues to be attractive, despite its ups and downs. As our own experience here in the US has shown, a wildly accommodative central bank is very good for equity markets and it doesn’t get much more accommodative than a negative deposit rate. While European equities have had something of a volatile year, as ECB policy continues to develop we should see steady improvement. That’s especially true if it embarks upon it’s hinted at program of asset purchases.

I believe the real key to success for the rest of the year will be quality. With sentiment so mixed and so many markets putting in highs, I suspect the odds of a sell-off are fairly strong, hence the drop in growth and momentum-oriented names earlier this year. In this type of environment, high quality, attractively-priced companies should continue posting gains even as they provide an insurance policy against any sudden market drops.

Somewhat counterintuitively, I also suspect that hard asset and commodity-oriented plays might see a turnaround in the coming months. Inflation expectations appear to have bottomed out, with the growing coverage of the topic in the financial media excellent anecdotal evidence of that. At the same time, many of the major miners such as Rio Tinto (NYSE: RIO) and BHP Billiton (NYSE: BHP) have largely gotten their financial houses in order even as they deal with lower ore prices. But given the slower pace of global economic growth expected over the next few years, demand for all manner of metals and miners should continue firming, boding well for stabilization, if not improvement.

So, caution will be the watchword for the last half of the year, though that certainly doesn’t mean there aren’t opportunities out there, even if they are still a bit harder to find.