Receding political anxiety and a gathering economic recovery in Europe helped global equity markets advance in the first half of 2017. Yet Templeton Global Equity Group’s Cindy Sweeting and Tony Docal say investors should be somewhat cautious in the second half of the year. They believe rich stock valuations and shifting central bank policies could lead to bouts of volatility.

Global equities advanced solidly during the second quarter, capping a strong first half of 2017 and a similarly strong one-year period. Developed and emerging-market equities benefited from resilient corporate earnings, abundant liquidity and broad growth across most regions and sectors.

In retrospect, the markets’ lurch lower in the aftermath of the United Kingdom’s Brexit vote one year ago marked the bottoming phase of what had been a challenging and volatile time. It set the stage for a renewed advance in this multi-year bull market.

As we enter the second half of the year, markets now appear to reflect a somewhat cautious, if not uncomfortable, optimism. Experimental central bank monetary policy across the globe has fueled global stock price appreciation, but a dangerous dependency on stimulus to generate ever-higher market returns is a possible side effect. This could present challenges for future equity market performance as major central banks gradually move to normalize extraordinarily supportive policy measures.

In the current environment, we think long-term investors should not buy equities indiscriminately. However, we do see pockets of opportunity in certain markets and sectors across the globe. We believe this is an environment where value discipline and active risk management will be rewarded over the long term.

China’s Year of Calm

The Chinese government’s recent measures to rein in credit creation and fiscal stimulus while avoiding a major economic slowdown appear to be proceeding steadily. We expect these themes to remain dominant ahead of this fall’s 19th National Congress assembly, where President Xi Jinping is likely to further cement his authority.

Nevertheless, we cannot ignore the country’s sizable and unresolved credit excesses, the result of an investment boom that led to overcapacity in real estate and industrial sectors. If China’s economy slows too much, we believe China is likely to shelve its newer reforms and return to past measures to boost growth.

China’s issues are well known. So in large part, we’ve avoided the vulnerable and opaque banking sector, state-owned enterprises and the oversupplied industrial complex. We see value in companies with underappreciated growth potential, mainly in the health care, insurance and information technology sectors. Certain franchises in the telecom sector where we find a combination of cheap valuation and strong free cash flow also appear attractive to us.