* Peripheral stocks 'overbought', ripe for pull-back
* Borrowing of Italian, Portuguese shares rise - Sunguard
* Portuguese stocks' P/E at 16.2; German stocks at 13
By Toni Vorobyova and Blaise Robinson
LONDON/PARIS, Jan 10 (Reuters) - Spanish, Italian and Portuguese equities have been star performers in 2014 so far, but not everyone is convinced, and bets on a future retreat in the euro zone periphery are rising.
Portugal's PSI20 has rallied 8.3 percent this year, Spain's IBEX is up 3.8 percent and Italy's FTSE MIB is up 3.3 percent, powering to 2-1/2 year highs, in tune with a slide in their governments' bond yields on expectations that the countries hardest hit by the euro zone crisis will be the main beneficiaries as the economy recovers.
By contrast, the German DAX, which led the European equity market in 2012 and 2013 due to its exposure to global growth and financial stability, is down 0.8 percent.
However, the moves in cash equities have sparked a rush of contrarian bets in other areas of the market where nimble players like hedge funds are active.
Investors have been ramping up short positions on peripheral Europe - borrowing shares to sell, and banking prices will fall before the loan is due - betting that core European markets will outperform the periphery once the new-year euphoria fades.
Borrowing volumes on Spanish equities are up 2.5 percent since Jan. 1, while those for Portugal have risen 6.7 percent, according to data from Sungard's Astec Analytics.
"It would seem to me that the short side believe the buying of peripheral equities is over-hyped, and so are taking out positions against those gains," said Karl Loomes, market analyst at Astec Analytics.
Negative bets on peripheral stocks, however, have mostly targeted specific companies rather than the countries more broadly.
In Italy, borrowing volumes in troubled lender Monte dei Paschi di Siena, whose top shareholders delayed a rights issue last month, have risen, while those in stronger peers like Intesa Sanpaolo fell.
For now, such bets are very much for the minority - with most investors unwilling to go against the tide even if they are not convinced by the periphery recovery story.
"The euphoria about peripheral euro zone has been quite high in the past week; everyone wants a piece of this recovery story," a Paris-based trader said.
"But these stocks are strongly 'overbought' at the moment, are ripe for a correction, so taking short positions at these levels is a contrarian play that could pay off nicely."
Technical charts show Italy and Spain at their most overbought levels in 2-1/2 months, and Portugal at its highest in a year, seven-day Relative Strength Indexes (RSI) show.
"This week we even see panic from investors who fear they are missing the rally, which explains the strong gains seen in just a few days. It's gone a bit too fast, so there's a risk of a pull-back before the end of the month," said Regis Bégué, head of equities at Lazard Frères Gestion.
Parts of the periphery looking more expensive than Germany, when comparing share prices to earnings.
German stocks trade at 13 times expected earnings over the next 12 months. That is more expensive than Italy on 12.1 times, but markedly cheaper than Spain at 13.9 times and Portugal at 16.2 times, according to Thomson Reuters Datastream.
Options markets also sound a note of caution. So far this year, investors have bought twice as many put options - used to protect against or bet on a market fall - on the IBEX as calls.
Although puts are traditionally more popular than calls - which bet on a market rally - the disparity in demand has been less strong on the DAX and on the Euro STOXX 50 index of euro zone blue chips.
The economic data, though, appears to offer some backing to the rally. Economic morale jumped 4.0 points in Spain and 2.3 points in Italy in December, compared with a rise of just 0.3 points in Germany.
That said, at 106.0 points, the German sentiment index was still one of the strongest in the euro zone, easily beating 100.0 in Spain and 96.2 in Italy, and underscoring how far those countries have to go to catch up.
"Economic growth will remain stronger in Germany ... In that sense, German stocks will strongly outperform European peers," said Claudia Panseri, head of Societe Generale Private Banking, which has 84 billion euros ($114 billion) of assets under management.